Executive Summary / Key Takeaways

• FormFactor, Inc. is strategically positioned at the nexus of advanced packaging and generative AI, driving demand for its high-performance probe cards and systems. The company's differentiated SmartMatrix and Apollo MEMS technologies are critical enablers for next-generation High Bandwidth Memory (HBM) and high-performance compute applications.
• Despite recent gross margin pressures from product mix shifts and tariffs, FormFactor is executing a multi-pronged strategy to restore profitability, targeting 47% non-GAAP gross margins. Initial cost reduction efforts have shown promising results, with Q3 2025 non-GAAP gross margins increasing by 250 basis points sequentially to 41%.
• The company's strategic investments, including a minority stake in FICT Limited for critical organic substrates and the acquisition of a new manufacturing facility in Farmers Branch, Texas, are designed to enhance capacity, lower operational costs, and solidify its competitive moat in the long term.
• FormFactor anticipates continued sequential growth in Q4 2025, with projected revenues of $210 million (plus or minus $5 million) and non-GAAP EPS of $0.35 (plus or minus $0.04), driven by HBM4 ramps and progress in new customer qualifications for CPU and GPU applications.
• Key factors for investors to monitor include the successful ramp of the Farmers Branch facility, the realization of market share gains in GPU and fabless CPU segments, and the ongoing mitigation of tariff impacts on gross margins.

The Foundation of Advanced Test: Powering the AI Revolution

FormFactor, Inc., established in 1993, has evolved into a leading provider of essential test and measurement technologies crucial for the semiconductor product lifecycle. Headquartered in Livermore, California, the company's core business revolves around high-performance probe cards, analytical probes, probe stations, thermal systems, and cryogenic systems. This specialized portfolio positions FormFactor at the forefront of two dominant industry themes: advanced packaging and generative AI. As the traditional scaling benefits of Moore's Law decelerate, innovations in advanced packaging and chiplets are enabling customers to accelerate their roadmaps, delivering significant performance improvements in compute and memory. FormFactor's technologies are uniquely instrumental in ensuring the quality and performance of individual chiplets and complex chiplet stacks within these advanced packages.

The company's strategic journey, marked by key acquisitions like MicroProbe in 2012 (which brought current CEO Mike Slessor into leadership) and Advantest probe card assets in 2020, has consistently aimed at strengthening its technological capabilities and market reach. A pivotal move in 2023 was the proactive divestiture of its China operations, a response to escalating U.S. export controls and tariffs, allowing FormFactor to re-focus on other high-growth regions and opportunities. This historical trajectory underscores FormFactor's adaptive strategy in a dynamic industry, continually refining its focus to align with emerging technological imperatives and geopolitical realities.

In the highly competitive semiconductor equipment and materials sector, FormFactor differentiates itself through precision and customization. While larger rivals like Teradyne (TER) and Advantest offer broader automated testing solutions and dominate in high-volume memory testing, respectively, FormFactor excels in specialized, high-precision applications. The company's recognition as the #1 global supplier in both test subsystems and focused chip-making equipment in TechInsights' 2025 global customer satisfaction survey highlights its leadership in quality and technology, often outpacing direct competitors in these specific areas. This specialized focus, particularly in areas demanding extreme accuracy and performance, forms a critical competitive moat against the scale and diversification of its larger peers.

Technological Edge: Probing the Future of Compute

FormFactor's core competitive advantage is deeply rooted in its differentiated technology, which is purpose-built to address the escalating test intensity and complexity driven by advanced packaging and AI.

The company's SmartMatrix and IntelliFusion DRAM probe card architectures are prime examples of this technological leadership. For instance, the SmartMatrix architecture stands out as the industry's only production-proven high parallelism probe card architecture capable of operating at 10 gigabit-plus frequencies. This capability is crucial for testing next-generation HBM4 designs, allowing customers to validate product performance at these higher and more valuable I/O speeds. The transition to HBM4 involves more complex 16-high stacks of core die chiplets, a significant increase from the 8 and 12-high stacks of HBM3. This architectural shift inherently amplifies test intensity, as each individual chiplet within the stack must be comprehensively tested to prevent a single defective die from causing a failure of the entire stack. This increased test intensity translates directly into higher demand for FormFactor's advanced probe cards. A third-party estimate indicates that HBM probe card intensity is almost 1%, meaning customers spend nearly 1% of their HBM revenues on probe cards, a figure double that of the broader semiconductor industry.

In the Foundry and Logic segment, FormFactor leverages its Apollo MEMS probe card technology. This technology is central to the company's efforts to gain market share in high-performance compute applications, including GPUs and mainstream CPUs. FormFactor has met all technical requirements for a major GPU application and is in the pilot production stage of qualification, aiming to compete for volume orders in the first half of 2026. Similarly, the company is qualifying its Apollo MEMS technology on a mainstream CPU device for a large fabless CPU manufacturer, with volume ramps forecasted for next year. These initiatives are critical for diversifying FormFactor's revenue streams beyond traditional client PC and mobile markets, which have experienced tepid demand.

Beyond probe cards, FormFactor's Systems segment offers leading-edge measurement systems like the CM300 Lab Probers and IQ2000/IQ3000 cryogenic probers. These systems are vital for customer innovation in areas such as quantum computing and co-packaged optics (CPO). The Triton silicon photonics test system, developed in collaboration with Advantest and Tokyo Electron (TOELY), exemplifies FormFactor's commitment to CPO. Triton integrates optical and electrical probe and test capabilities for fab-level automation, transitioning FormFactor's differentiated electro-optical probing technology from the lab to the fab. CPO offers compelling power and speed advantages for data centers, addressing a major energy consumption challenge for AI growth. FormFactor has an installed base of over 100 systems worldwide in the silicon photonic lab space and is now extending this leadership to production, with multiple systems being shipped to support pilot production of high-volume CPO photonic integrated circuits. The fusing of electrical and optical test capabilities presents a significant long-term opportunity for FormFactor.

FormFactor's R&D initiatives are also focused on enhancing cost competitiveness. The company is developing and releasing a new lower-cost DRAM architecture for the non-HBM commodity market, with pilot volumes already shipped to a beta customer. This aims to improve gross margins in a segment historically characterized by lower profitability. The investment in FICT Limited, a leading supplier of complex multi-layer organic substrates, further solidifies FormFactor's access to a critical enabling component for advanced foundry and logic probe cards, ensuring supply chain resilience and fostering closer collaboration on future product roadmaps.

For investors, these technological differentiators translate into a robust competitive moat. The ability to deliver superior performance in high-speed, high-complexity testing environments allows FormFactor to command higher average selling prices (ASPs) and secure stronger customer loyalty. The strategic investments in R&D and partnerships are designed to lower manufacturing costs, expand capacity, and capture market share in rapidly growing, high-value segments like HBM4, GPUs, and CPO, thereby driving long-term revenue growth and profitability.

Strategic Execution and Financial Performance

FormFactor's financial performance in recent periods reflects both the opportunities presented by the AI boom and the challenges of a volatile market. For the nine months ended September 27, 2025, the company reported revenues of $569.83 million, a slight decrease from $574.12 million in the prior year period. Net income for the same period was $31.14 million, down from $59.91 million in the nine months ended September 28, 2024, primarily due to a $20.30 million gain recognized in fiscal 2024 from the sale of its China operations.

Despite the top-line moderation, FormFactor demonstrated encouraging progress in profitability. In Q3 2025, revenues reached $202.68 million, exceeding the midpoint of the company's outlook. Critically, non-GAAP gross margins improved significantly, increasing by 250 basis points sequentially to 41%, landing at the high end of the outlook range. This improvement was broad-based, with the Probe Cards segment's non-GAAP gross margin rising by 254 basis points to 40.8% and the Systems segment's non-GAAP gross margin increasing by 260 basis points to 42.0%. This positive trend is attributed to initial benefits from reductions in labor costs and manufacturing spending, which are mix-independent.

The company's liquidity remains solid, with cash, cash equivalents, and marketable securities totaling approximately $266 million as of September 27, 2025. FormFactor also has access to a full $150 million under its revolving credit facility, which was established on July 29, 2025, and remained undrawn. Working capital stood at $429.10 million.

Cash flow generation saw a notable rebound in Q3 2025, with free cash flow reaching $19.7 million, a significant improvement from a negative $47.1 million in Q2 2025, which was impacted by the $55 million acquisition of the Farmers Branch, Texas manufacturing facility. Operating cash flows in Q3 2025 were $27 million, driven by improved net income and gross margins.

FormFactor's strategic investments are designed to bolster its long-term financial health. The Farmers Branch facility, acquired for $55 million in June 2025, is a "scarce, fit-for-purpose asset" intended to rapidly and cost-effectively expand manufacturing capacity in a lower-operating cost region. The company projects cash expenditures for this site to be between $140 million and $170 million in fiscal 2026, with initial production ramping in late Q4 2026 and the majority of capacity coming online in 2027. This investment is expected to drive gross margin improvements beyond the current target model. The $67.2 million equity investment in FICT Limited in February 2025 secures access to critical multi-layer organic substrates, a key component for advanced probe cards.

Outlook and Risks

FormFactor's outlook for Q4 2025 reflects continued momentum and a commitment to its profitability goals. The company anticipates revenues of $210 million, plus or minus $5 million, representing sequential growth. Non-GAAP gross margins are projected to further improve to 42%, plus or minus 150 basis points, driven by increased revenues, a more favorable product mix, and ongoing cost reduction initiatives. Non-GAAP operating expenses are expected to be $58 million, plus or minus $2 million, reflecting higher incentive-based compensation, R&D spending, and initial start-up costs for the Farmers Branch facility. Non-GAAP earnings per fully diluted share for Q4 2025 are guided at $0.35, plus or minus $0.04. The effective tax rate for Q4 is expected to be between 17% and 21%.

Management expects short-term gross margin improvements to continue throughout 2026, steadily closing the gap to its target model of 47% non-GAAP gross margins. The long-term vision includes FormFactor outgrowing the overall HBM industry due to the increased test intensity and complexity of HBM4. The company also projects a significant impact in 2026 from new customer ramps in CPU and GPU applications, with addressable markets estimated at tens of millions of dollars per quarter. Co-packaged optics (CPO) is expected to begin ramping in volume later in 2025 and into 2026, providing a new growth vector for both the Systems and Probe Cards segments.

Despite this positive outlook, several risks warrant investor attention. The company's manufacturing operations rely on a limited number of suppliers for key components, some of which are sole sources, posing potential supply chain vulnerabilities. Tariffs continue to exert pressure on gross margins, with an estimated 150 to 200 basis point impact, and efforts to mitigate these effects are ongoing. While the PC and mobile markets show signs of broader recovery, demand for CPU probe cards remains tepid, with current needs met by legacy designs. The timing and magnitude of a full recovery in these high-volume markets remain uncertain. Furthermore, geopolitical factors, including export controls and trade barriers, particularly with China, continue to be a structural headwind, limiting FormFactor's ability to serve customers in that region. The company also carries a gross liability for unrecognized tax benefits of $52 million and a deferred grant of $18 million, both with uncertain timing for potential payments.

Conclusion

FormFactor stands at a pivotal juncture, leveraging its deep technological expertise and strategic investments to capitalize on the transformative growth in advanced packaging and generative AI. The company's differentiated probe card architectures, such as SmartMatrix and Apollo MEMS, are indispensable for testing the intricate HBM4, GPU, and CPO designs that underpin the AI revolution. While facing near-term headwinds from product mix and tariffs, FormFactor's disciplined operational improvements and strategic capacity expansion at its Farmers Branch facility are laying the groundwork for a return to its target 47% non-GAAP gross margins.

The company's proactive diversification of its customer base and product portfolio, alongside key partnerships with industry leaders like Advantest (ATEYY) and FICT Limited, reinforces its competitive position. As HBM4 ramps, new CPU and GPU qualifications mature, and co-packaged optics transitions to high-volume production, FormFactor is well-positioned for sustained growth in 2025 and beyond. Investors should recognize FormFactor's critical role as an enabler of next-generation semiconductor technologies and monitor its execution on gross margin expansion and market share gains in these high-growth segments.